Limited company shares are liable to Inheritance Tax under certain circumstances. It depends on how much they are worth and whether particular conditions are satisfied. If you run your own company or hold shares in another business, it’s important to have a plan in place for these shares upon your retirement or if you pass away.
Below is a basic guide explaining when and how much Inheritance Tax is payable on limited company shares. However, you should seek professional estate planning advice to minimise the tax burden on your beneficiaries. This will enable you to pass on your shares and other assets efficiently.
Key Takeaways
- Shares in a limited company form part of a deceased person’s estate and may be subject to Inheritance Tax. This is typically chargeable at 40% above the tax-free threshold.
- Business Relief can reduce the value of qualifying business assets for IHT purposes – potentially up to 100%.
- To qualify for Business Relief, the shares must generally be in a trading company. The deceased person must also have owned them for at least 2 years before death.
When is Inheritance Tax payable on limited company shares?
Inheritance Tax (IHT) applies to the estate of someone who has passed away. An ‘estate’ comprises property, money, and possessions – including shares in a limited company.
Typically, however, no such tax is payable if:
- The value of your estate is less than the £325,000 IHT threshold, or
- You leave all other assets above £325,000 to your spouse or civil partner, a charity, or a community amateur sports club
If your estate is worth more than £325,000, the liability for Inheritance Tax on your shares depends on several factors. Namely, whether they are held in a quoted (public) limited company or a private limited company.
If you own shares in a public limited company and your estate value exceeds the IHT threshold, the shares will be subject to Inheritance Tax. However, 50% relief may be available upon satisfying certain qualifying conditions.
Shares in private limited companies generally qualify for Business Relief. This means that your beneficiaries may not have to pay any Inheritance Tax on the company shares they receive from you, even if your estate is worth more than £325,000.
What is the current Inheritance Tax rate?
The standard rate of Inheritance Tax is currently 40%. However, it only applies to the part of the deceased’s estate above the threshold.
Shares that someone gives away while alive are liable to ‘taper relief’ after they pass away. The amount of relief depends on when the shares were gifted.
A reduced rate of 36% may apply to some assets if at least 10% of the estate’s net value is left to charity.
Business Relief on company shares
Business Relief (previously Business Property Relief) shelters certain types of company shares from Inheritance Tax. 100% tax relief is available on shares in a private limited company or a limited company listed on the Alternative Investment Market (AIM). 50% relief is available on shares controlling more than 50% of the voting rights in a public limited company.
To qualify for Business Relief, the deceased must have owned the shares for at least two years before passing away. Additionally, the company in which the shares are held must not:
- Be a not-for-profit organisation
- Mainly deal with securities, stocks or shares, land or buildings, or in making or holding investments (i.e. it must be a trading company)
- Be in the process of being sold, unless the sale is to a firm that will carry on the business, and the estate will be paid mainly in shares of that company
- Be in the process of being wound up, unless this is part of a process to allow the continuation of the company’s business
Shares in buy-to-let properties are excluded from Business Relief because they are viewed as a type of investment company.
The executor of the will or administrator of the estate will claim this relief by completing form IHT400 (Inheritance Tax account) and schedule IHT413 (Business or partnership interests and assets) when they’re valuing the estate.
Giving away shares while you are alive
If you give your limited company shares to someone else while you’re alive, Inheritance Tax liability may still arise after your death. This applies to shares listed on the London Stock Exchange and unlisted shares you held for less than 2 years before your death.
If you pass away within 7 years of transferring shares and they are liable to Inheritance Tax, the rate of tax payable after your death depends on when you gifted them.
The shares will be liable to 40% IHT if you give them away in the 3 years before your death. However, if you gift them 3 to 7 years before you pass away, they will be taxable on a sliding scale at the following rates:
- 32% if there are 3 to 4 years between gifted shares and death
- 24% if there are 4 to 5 years
- 16% if there are 5 to 6 years
- 8% if there are 6 to 7 years
This is known as ‘taper relief’. It only applies if the total value of shares you give away in the 7 years before death exceeds £325,000.
No IHT tax will be due if you survive for at least 7 years after gifting the shares unless they are part of a trust. This ‘7-year rule’ can be advantageous if your shares do not qualify for Business Relief but you want to gift them to your children. One example would be shares in a buy-to-let property business.
When you give away your shares, you may also have to pay Capital Gains Tax or Income Tax if they’ve increased in value while you’ve owned them.
Gifting company shares to your spouse or civil partner
There is no Inheritance Tax to pay on limited company shares you give to your spouse or civil partner, regardless of their value, provided that:
- They permanently reside in the UK
- You are legally married to each other or in a civil partnership
If they keep the shares until their death, Business Relief may apply to the shares when they pass away. However, if they sell them, this relief will be lost. Any money from the sale included in their estate will be liable to Inheritance Tax after their death.
Generally, any shares you leave to charities will also be exempt from Inheritance Tax.
Who is responsible for paying Inheritance Tax on limited company shares?
The person dealing with the estate will use funds from the estate to pay any Inheritance Tax due to HMRC. They will also consider any reliefs that may be available when valuing the assets.
Usually, beneficiaries do not pay tax on anything they inherit. However, they may be liable for related taxes – for example, if they receive rental income from a property left to them in a will.
You can contact the Inheritance Tax helpline if you have any general queries. For comprehensive, tailored advice on Inheritance Tax and estate planning, you should speak to a solicitor.
Thanks for reading
Inheritance tax is a highly complex area requiring professional help and guidance. Passing on your limited company shares is no exception.
Nevertheless, it is possible to avoid or minimise their future tax liability with careful consideration and professional estate planning advice.
If you have any questions about this post or other queries about limited company shares, please leave a comment below. You’ll also find more business advice and limited company guidance on the Rapid Formations Blog.
Please note that the information provided in this article is for general informational purposes only and does not constitute legal, tax, or professional advice. While our aim is that the content is accurate and up to date, it should not be relied upon as a substitute for tailored advice from qualified professionals. We strongly recommend that you seek independent legal and tax advice specific to your circumstances before acting on any information contained in this article. We accept no responsibility or liability for any loss or damage that may result from your reliance on the information provided in this article. Use of the information contained in this article is entirely at your own risk.
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Comments (2)
Great article!
Thank you for your kind comment, Amelia. We’re glad you enjoyed it.
Kind regards,
The Rapid Formations Team